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Don't rush into taking your pension, just because you have access to it

16/09/2016 … Author:

With great power lies great responsibility and following the recent pension announcements there has been an extensive concern regarding the freedom given to those approaching retirement age.For those unaware, in April this year sweeping changes were made which allow individuals who are aged 55 and over to make large withdrawals from their defined contribution pension schemes.

As individuals gain the power to withdraw their pension all in one go and without any restriction, the pension freedoms have received a tremendous amount of coverage, and quite rightly so. Most reflect the new rules as a positive opportunity; enabling the opportunity to afford exciting new lifestyle changes or, most probably because accessing such a large lump sum is too tempting. However, is emptying your pension fund really the best option?

Before I explain any further, it is important to warn that only 25% of your pension pot is available to be taken tax-free. The rest will be taxed an income when it is withdrawn from your pension pot which is likely to result in a very large tax bill. Gaining access to your pension pot does not necessarily mean that you should take this option straight away. Have you considered if you have alternative investments you could rely on as a source of income instead of your pension?

Personal pension providers will allow you defer taking your pension if you choose to. This means your pension will remain invested, and subsequently any growth achieved during this period will remain tax-free. Would this influence your decision to avoid cashing out early? After all, waiting to withdraw your pension could enable the potential to have a higher income at a later date.

This table below shows the potential annual income a male or female might receive from a single life annuity bought with a £50,000 pension pot, dependent upon delaying their retirement at four different ages: 60, 65, 70 and 75.

  • 60  - £2,587.06 (5.2% of pension pot)
  • 65  - £2,919.74 (5.8% of pension pot)
  • 70  - £3,333.08 (6.7% of pension pot)
  • 75  - £3,912.48 (7.8% of pension pot)

Source: Whole of market research via ‘IRESS Exchange’. Annuity options: no escalation, 5 year guarantee period, paid monthly in advance.

There are numerous other annuity products, including those that provide an income for a spouse or partner on death of the annuitant, those that take into account inflation and enhanced annuities for people who fit certain health or lifestyle categories, such as smokers, which invariably offer higher rates.

In addition, if you are able to and if it is allowed by your particular pension scheme, you can continue making savings into your pension. The current rules allow you to receive tax relief on your pension contribution until age 75.

Depending on whether you plan to fully retire or you begin to cut back your work hours more gradually, there does not need to be a hurry to withdraw from your pension if you don’t need to straight away. If you already have an income which you can comfortably live on, either through investments or savings, choosing to sit still with your pension pot beyond your selected retirement date could be the most beneficial option for you.

Before any decisions are made, let a Lowes Consultant walk you through your options. We will make check with your pension provider to see whether there are any restrictions or specific guarantees included in your pension that may be affected by delaying your retirement date. We can provide a full review of any existing pension arrangements while recommending the most appropriate course of action to ensure you gain the most from the new pension freedoms.

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